What You Can Learn From Bill Gross And PIMCO’s Troubles

“Trouble. Trouble, trouble, trouble, trouble.” Reading all the news about Bill Gross and PIMCO, I keep hearing that Ray LaMontagne song in my head. (Go ahead—give it a listen while you read this, just for fun.)

The king of bonds isn’t yet abdicating the throne, but it’s been a rough stretch since PIMCO came down from the mountain to translate the etchings on the “New Normal” tablets. It was, of course, hard to argue the logic in 2009, that U.S. markets would struggle under the weight of a sluggish economy hampered by high unemployment and systemic government debt. But as it often does in the face of supposed certainty, the market defied man’s expectations.

Following the new normal playbook, PIMCO bet against Treasurys in 2011, when its flagship fund, Total Return, captured only 53% of the Barclays U.S. Aggregate Bond index return for that year. In 2013, the fund barely beat the Barclays index, but it lost money for the first time since 1999—accelerating a trend of fund outflows.

Then things started to reflect daytime television, when Gross’ heir apparent, Mohamed El-Erian, departed in the midst of rumors of dissent at the top of the organization. Those rumors were confirmed when TheWall Street Journal published an articlebased on reports by unnamed inside sources, accusing Gross of comparing himself publicly to the unbeatable racehorse, Secretariat. ThenMorningstardowngraded PIMCO’s “stewardship grade” to C from B.

Beyond the tabloid fodder, however, there is a vital investing lesson to take away from this still-evolving story: